Economic Snapshot for October 2011

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Economic Snapshot for October 2011
Christian E. Weller on the State of the Economy
Christian E. Weller, associate professor, Department of Public Policy and Public Affairs, University of Massachusetts Boston, and Senior Fellow, Center for American Progress October 2011

We are living through a two-faced economy. On one hand, corporate profits are high, corporate cash holdings are soaring, and income gains are proliferating among the rich. On the other, job growth is meager, unemployment stays high, and America’s middle class sees the foundation for a better life tomorrow erode in a sea of debt. Bottom line: The economy is not working for millions of people who are looking for jobs and facing tremendous economic uncertainty. Policy needs to focus on creating more and better jobs quicker than has been the case in the economic expansion so far. This can happen through necessary public investments that can promptly put people back to work, as well as extended unemployment benefits and lower payroll taxes, for instance. Policymakers have an opportunity to put down key markers on tax and spending priorities with the work of the super committee charged with finding ways to rein in the long-term budget deficits. This work will directly impact the economic security of struggling American families and the outlook for growth and future living standards for years to come. • Economic growth remains low. Gross domestic product, or GDP, grew at an annual rate of 2.5 percent in the third quarter of 2011. The economy has expanded now by 5.6 percent in inflation-adjusted terms, the slowest growth during the first nine quarters of an economic recovery since World War II. Business investment expanded at a strong 16.3 percent in the third quarter of 2011, while export growth remained subpar with 4.0 percent, consumption regained some strength, expanding at 2.4 percent, but only because personal saving fell precipitously. And government spending was flat. Economic growth is still too low to create sufficient

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Center for American Progress | Economic Snapshot for October 2011

jobs to substantially reduce the unemployment rate. Low personal income growth is holding back consumer demand and fiscal troubles of governments in the United States and abroad impede U.S. economic growth. • The trade deficit stays high as imports outpace exports. The U.S. trade deficit stood at 4 percent of GDP in the second quarter of 2011, up from its last trough of 2.4 percent of GDP in the second quarter of 2009 and the largest deficit since the end of 2008.1 The solid U.S. export performance of the past few years has not been enough to overcome even larger import increases, led in part by higher oil prices. This puts more pressure on other parts of the economy—consumption and business investment chief among them—to generate faster economic growth and jobs. • The labor market recovery slows. The private sector continuously added jobs from Figure 1 February 2010 to September 2011 for a Monthly job change since start of Great Recession total of 2.6 million jobs. And private-sector Jobs (in thousands) growth slowed substantially, from May 2011 600 through September 2011, averaging only 400 105,000 jobs per month, down from 196,000 200 jobs per month in the preceding five months. 0 Private-sector job growth is further offset -200 by job losses in state and local governments, -400 where teachers, bus drivers, firefighters, and -600 police officers, among others, are being let go, -800 reflecting governments’ budget troubles. A -1,000 total of 437,000 state and local government Jan ‘08 July ‘08 Jan ‘09 July ‘09 Jan ‘10 July ‘10 Jan ‘11 July ‘11 jobs were lost between February 2010 and September 2011.2 Private-sector job growth is too weak to improve the economic fortunes of America’s middle class, making jobs policymakers’ top priority. • Unemployment stays high amid weak job growth. The unemployment rate stood at 9.1 percent in September 2011. Long-term unemployment ballooned as the unemployment rate stayed high. In September 2011, 44.6 percent of the unemployed had been out of work and looking for a job for more than six months. The average length of unemployment stayed close to a record high, with 40.5 weeks in August 2011. Millions of unemployed stand to lose their benefits if Congress does not extend unemployment insurance benefits for the long-term unemployed, comprising 6.2 million people in September 2011,3 at the end of 2011.

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Center for American Progress | Economic Snapshot for October 2011

• Labor market pressures fall especially on communities of color, young workers, and those with little education. The African American unemployment rate in September 2011 stayed well above average at 16 percent and the Hispanic unemployment rate stayed high with 11.3 percent, while the white unemployment rate was 8 percent. Youth unemployment stood at a high 24.6 percent. And the unemployment rate for people without a high school diploma stayed high with 14 percent, compared to 9.7 percent for those with a high school diploma, and 4.2 percent for those with a college degree.4 Vulnerable groups have struggled disproportionately more amid the weak labor market of the past few years than white workers, older workers, and workers with more education. But even those groups that fare better than their counterparts in the weak labor market suffer tremendously from high and long-term unemployment. • Household incomes continue drop amid prolonged labor market weaknesses. Median inflation-adjusted household income—half of all households have more and the other half has less—stood at $49,445 in 2010, its lowest level in inflation-adjusted dollars since 1996. It fell again by 2.3 percent in 2010, an accelerated decline after median income dropped by 0.7 percent in 2009. American families saw few gains during the recovery before the crisis hit in 2008 and experienced no income gains during the current economic recovery after 2009.5 • Income inequality rises. Households at the 95th percentile, with incomes of $180,810 in 2010, had incomes that were more than nine times—9.04 times, to be exact—the incomes of households at the 20th percentile, with incomes of $20,000. This is the largest gap between the top 5 percent and the bottom 20 percent of households since the U.S. Census Bureau started keeping record in 1967.6 • Poverty continues to rise across a wide spectrum. The poverty rate rose to 15.1 percent in 2010—its highest rate since 1993. The African American poverty rate was 27.4 percent, the Hispanic rate was 26.6 percent, and the white rate was 9.9 percent in 2010. The poverty rate for children under the age of 18 stood at 22 percent. More than one-third of African American children (39.1 percent) lived in poverty in 2010, along with 35 percent of Hispanic children and 12.4 percent of white children.7 The prolonged economic slump, following an exceptionally weak labor market before the crisis, has taken a massive toll on the most vulnerable. • Employer-provided health insurance benefits continue to disappear. The share of people with employer-provided health insurance dropped from 65.1 percent in 2000 to 55.3 percent in 2010. This is the lowest share since 1987, when the

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Center for American Progress | Economic Snapshot for October 2011

Census started to track these data.8 Families’ income woes are thus further exacerbated by less access to affordable health insurance since families will have to save more than in the past to prepare for eventual economic emergencies. • Family wealth losses linger. Total family wealth is down $12.8 trillion (in 2011 dollars) from June 2007—its last peak—to June 2011. Home equity stays low, such that homeowners on average still own only 38.6 percent of their homes, with the rest owed to banks.9 This is the lowest share on record, going back to 1952. Households, already struggling with low incomes in a weak labor market, consequently feel growing pressures to save more and consume less. The personal savings rate increased from 2.3 percent of after-tax income in June 2007 to 5.2 percent in June 2011.10 The dual burden of low income and decimated household wealth puts the brakes on consumer spending, holding back economic and job growth. • Households are burdened by large debt levels. Total household debt equaled 114.3 percent of after-tax income in June 2011. This is down from a record high of 130.2 percent in September 2007, but still higher than at any point before September 2004.11 The unprecedented decrease in household indebtedness during the crisis resulted from a combination of factors—tight lending standards, falling interest rates, and massive foreclosures—that are slowly abating, suggesting that further decreases in household indebtedness, or deleveraging, will also slow, unless incomes rise faster than they have in the past. High household debt will hence continue to slow economic growth in the future as households focus on saving more, rather than spending.

Figure 2

Household debt to after-tax income, 1952 to 2011
Percent of after-tax income
140%

120% 100% 80% 60% 40% 20% 0%

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• Financial distress is widespread among families. One in eight mortgages is delinquent or in foreclosure. The share of mortgages that were delinquent was 8.4 percent in the second quarter of 2011, and the share of mortgages that were in foreclosure was 4.4 percent at the same time.12 A weak job market coupled with massive wealth losses has pushed comparatively large shares of families into a desperate situation, reflected in delayed mortgage payments and very high foreclosure rates for several years now. This household economic distress rever-

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berates across the economy as banks are nervous about extending new credit, thus prolonging the economic slump. • Profitable corporations prioritize cash
holdings and other activities over hiring.

Figure 3

Share of mortgages that are delinquent or in foreclosure
12% Foreclosures 10% Delinquencies

After-tax profits of nonfinancial corpo8% rations increased by 85.2 percent from 6% December 2008, the most recent low 13 point in profitability, to June 2011. 4% Cash holdings rose to 13.6 percent of 2% financial assets in June 2011, its highest share since March 1984. Nonfinancial 0% corporations built up more cash holdings since December 2007, even as, on average, they spent more than all of their Source: Mortgage Bankers Association, 2011, National Delinquency Survey, Washington, DC: MBAA. after-tax profits—104.8 percent—on buying back their own shares and paying out dividends. The weak labor market is thus not a reflection of employers not having the money to hire more workers but rather employers focusing on improving their profitability. Corporations then prioritize building up their cash reserves and propping up their share prices over hiring new employees.
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Endnotes
1 Trade deficit as share of GDP are calculated as share of net exports out of nominal GDP, based on Bureau of Economic Analysis, National Income and Product Accounts, (Department of Commerce, 2011) Employment growth data are calculated based on Bureau of Labor Statistics, Current Employment Statistics, (Department of Labor, 2011). The Current Employment Statistics are also known as the payroll survey. Unemployment numbers are taken from the Bureau of Labor Statistics, Current Population Survey, (Department of Labor, 2011). The Current Population Survey is also known as the household survey. Unemployment rates by demographic characteristics are taken from the Bureau of Labor Statistics, Current Population Survey. Data for family incomes are from the U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010, (Department of Commerce, 2011). This report is occasionally referred to as the poverty report. Other measures of income dispersion also show a growing gap between families in the top 5 percent, top 10 percent, and top 20 percent, relative to families in the bottom 20 percent and bottom 50 percent. See U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010 Data for poverty rates are from U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010. 8 Data for health insurance are from U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2010. Wealth calculations are based on the Board of Governors, “Release Z.1 Flow of Funds Accounts of the United States,” (Federal Reserve System, 2011). Real wealth is the nominal wealth deflated by the price index for the Personal Consumption Expenditure index. The Personal Consumption Expenditure index is from the Bureau of Economic Analysis, National Income and Product Accounts, (Department of Commerce, 2011).

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10 All GDP data are from the Bureau of Economic Analysis, National Income and Product Accounts, (Department of Commerce, 2011). Investment growth is expressed as year-over-year change, rather than the most recent quarterly change by itself, as quarterly investment data can be more volatile than consumption data. 11 Debt calculations are based on the Board of Governors, “Release Z.1 Flow of Funds Accounts of the United States,” (Federal Reserve System, 2011). Debt levels are the ratio of the nominal debt levels divided by the nominal disposable personal income. Debt refers to total credit instruments. 12 Data are taken from the Mortgage Bankers Association, “National Delinquency Survey” (Washington, DC: 2011). 13 Calculations are based on the Board of Governors, Federal Reserve System, 2011, Release Z.1 Flow of Funds Accounts of the United States, Washington, DC: BOG.